Beware of illegal early release and tax avoidance schemes involving your self-managed super fund (SMSF).
We are seeing various illegal early release and tax avoidance schemes targeting Australians:
- Illegal early release schemes encourage people to set up an SMSF and use their super benefits for personal purposes.
- Tax avoidance schemes encourage people to channel money inappropriately into their SMSF to avoid paying tax.
Retirement and tax planning is permitted but only when carried out within the tax and superannuation laws.
An SMSF is a trust generally run for the sole purpose of providing retirement benefits to its members. Generally, it's illegal for anyone to benefit from the SMSF outside this arrangement.
You may risk losing some or all of your retirement savings and receive serious penalties if you enter into a scheme. You could also be disqualified as a trustee of your SMSF which could result in your fund being wound up.
Don't be tempted by 'too good to be true' schemes and risk your retirement savings. We encourage you to and seek independent advice from an adviser who has no connection to the scheme before you commit to any arrangements.
You should consider how arrangements you enter affect your SMSF and whether they contravene the tax and super laws. A key issue in many SMSF's are dealings (or transactions) involving parties who are familiar to you and the consequences of not dealing on an arm's length basis.
Where you purchase business interests - whether they be property, a share in the business or similar structure, you should always check that your acquisition is at arm's length by obtaining an independent valuation at the time of the transfer.
Avoid making an investment that could result in significant capital gains tax and NALI consequences, by:
- speaking to an SMSF specialist for advice about the structure
- getting independent valuations appropriate to the type of asset you're investing in.
We also recommend tax professionals report tax avoidance schemes that are marketed to them to protect their clients and their practice.
Schemes have some common features, they:
- are artificial or contrived arrangements with complex structures around an existing or new SMSF
- involve seemingly unnecessary steps or transactions
- are designed to give the taxpayer minimal or zero tax or even a tax refund
- aim to bring forward a tax benefit
- invariably sound ‘too good to be true’ and they generally are.
Be aware of individuals who do not hold a financial license and promote schemes in their own right or on behalf of a business that also does not hold a financial license. You should check the ASIC financial registerExternal Link to make sure the person or business you are dealing with has a financial license.
Make sure you are receiving ethical professional advice when undertaking retirement planning. You should seek a second opinion from a trusted, licensed and reputable expert, especially if you are in any doubt.
If you think you’ve been approached by a promoter or caught up in a scheme, contact us immediately so we can help you.
Be aware of schemes with arrangements of concern, below:
- Non-concessional cap manipulation
- Dividend stripping
- Limited recourse borrowing arrangements (LRBA)
- Personal services income
- Mezzanine Lending
- Asset protection schemes
- Asset valuations
- Multiple SMSFs
- Inappropriate use of reserves
The following schemes relate to SMSFs and property.
Related-party property development ventures
Property development in associated joint venture structures that may result in substantial profits flowing to the SMSF. The related group entities provide most of the services and if not at arm's length market values, substantial profits may be attributed to the SMSF greatly out of proportion to the capital contributed.
Whilst an SMSF can invest directly or indirectly in property development ventures, extreme care must be taken.
Some arrangements can result in significant income tax and superannuation regulatory risks. And could potentially include the application of the NALI provisions and breaches of regulatory rules about related party transactions.
In May 2023, we published a Taxpayer Alert (TA) on these types of arrangements and how we are actively reviewing them.
For more information, see:
- TA 2023/2 Diverting profits of a property development project to an SMSF, through use of a special purpose vehicle, involving non-arm’s length arrangements.
- SMSF Regulator's Bulletin SMSFRB 2020/1 Self-managed superannuation funds and property development.
Residential property purchased in a member's name
This is where an SMSF is set up to help members buy residential property in their personal name. These schemes often target first home buyers wanting to enter the property market.
For more information on these schemes and why they concern us, see Residential property purchased through illegal SMSF schemes.
Legal life interest of property
This happens when an SMSF member or other related entity grants a legal life interest over commercial property to a SMSF. So the rental income diverted to the SMSF is taxed at a lower rate without full ownership of the property ever transferring to the SMSF.
Where SMSF members deliberately exceed their non-concessional contributions cap to manipulate the taxable and non-taxable components of their superannuation account balances.
When shareholders in a private company transfer ownership of their shares to a related SMSF. So, the company can pay franked dividends to the SMSF and strip profits from the company in a tax-free or concessionally taxed form.
For more information, see TA 2015/1 Dividend stripping arrangements involving the transfer of private company shares to a self-managed superannuation fund
The following schemes relate to LRBAs.
LRBA and arm's length dealings
SMSF trustees undertaking LRBA and related party lending arrangements that are not consistent with a genuine arm's length dealing.
LRBA and intra-group lending arrangements
Any lending arrangements which involve an SMSF, directly via an LRBA or indirectly through an associated entity that can benefit an SMSF needs to be on terms that are the same as those commercially available to people in the same or similar lending circumstances.
Any variation of these terms may include but are not limited to:
- the risks being taken by the lender
- interest rates
- terms of repayment.
Increasing SMSF balances and profits to the SMSF while below-market value interest payments are of particular interest to the ATO when conducting reviews into Non-arm's length income matters.
Where an individual (with an SMSF often in pension phase) diverts income earned from personal services to the SMSF to be concessionally taxed or treated as exempt from tax.
For more information, see TA 2016/6 Diverting personal services income to self-managed superannuation funds.
Lending by the SMSF with complex intra-group lending arrangements that provides finance and asset protection. The intra-group entities assume the risk, however the SMSF receives all of the profit from the arrangement.
Arrangements that claim to protect SMSF assets from creditors by mortgaging them to an asset protection trust (known as a 'Vestey Trust') present a compliance risk.
For more information, see SMSFs and schemes involving asset protection.
Where asset valuations are not fit for purpose and are being applied to the intra-group transfer of assets. The assets are being transferred to the SMSF at lower values than they're actually worth.
Improper use of multiple SMSFs. Having multiple SMSF's ordinarily does not raise compliance issues, but the establishment of additional SMSFs intended to manipulate tax outcomes would. For example:
- switching each of the respective funds between accumulation and retirement phase
- rolling over potentially tainted NALI funds into a new SMSF to avoid possible reviews and amendments by us
Many existing reserves in SMSFs arose legitimately from legacy pensions that are no longer available. As a result, there are very limited appropriate circumstances where new reserves could be established and maintained in SMSFs. Structures using reserves designed to bypass super balance and transfer balance cap measures will attract our scrutiny.
For more information, see SMSF Regulator’s Bulletin SMSFRB 2018/1 The use of reserves by self-managed superannuation funds.Beware of illegal early release and tax avoidance schemes involving your self-managed super fund (SMSF).